Regulatory Round Up: FinCEN Solicits Comments on Due Diligence for Correspondent and Private Bank Accounts

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Final Post in a Three-Post Series Regarding Recent Regulatory Action by FinCEN

On September 29, 2020, the Financial Crimes Enforcement Network (“FinCEN”) published a request for comment on existing regulations regarding enhanced due diligence (“EDD”) for correspondent bank accounts. The notice seeks to give the public an opportunity to comment on the existing regulatory requirements and burden estimates. Written comments must be received on or before November 30, 2020.

Currently, Bank Secrecy Act (“BSA”) regulations for due diligence and EDD for correspondent bank accounts require certain covered entities (banks, brokers or dealers in securities, futures, commission merchants, introducing brokers in commodities, and mutual funds) to establish due diligence programs that include risk-based, and, where necessary, enhanced policies, procedures, and controls reasonably designed to detect and report money laundering conducted through or involving any correspondent accounts established or maintained for foreign financial institutions. The regulations also require that these same financial institutions establish anti-money laundering (“AML”) programs “designed to detect and report money laundering conducted through or involving any private banking accounts established by the financial institutions.”

In issuing the request, FinCEN has not proposed any changes to the current regulations for correspondent or private banking. Instead, the request is intended to cover “a future expansion of the scope of the annual hourly burden and cost estimate associated with these regulations.”

This is the third and final post in a series of blogs regarding a recent flurry of regulatory activity by FinCEN. In our prior posts, we discussed a final rule by FinCEN extending BSA/AML regulatory requirements to banks lacking a Federal functional regulator, and FinCEN’s advanced notice of proposed rulemaking as to potential regulatory amendments regarding “effective and reasonably designed” anti-money laundering (“AML”) programs. Unlike the first two regulatory actions discussed in our series, FinCEN’s request for comments on the burdens of correspondent bank account due diligence and EDD seems purely procedural: it simply asks covered institutions to report how much time and resources are spent on compliance. Nonetheless, it’s hard not to conclude that this request for comment is a prelude to some future, more substantive action regarding correspondent bank account regulation. The U.S. Department of Treasury identified correspondent banking as a “key vulnerability” for exploitation by illicit actors in its 2020 National Strategy for Combating Terrorist and Other Illicit Financing. Further, and as we will discuss, correspondent banking has long had a troubled status: such accounts are simultaneously necessary to the world economy but also regarded as higher risk from an AML perspective. As a real-world example, an alleged lack of diligence regarding the risks posed by correspondent bank accounts played a prominent role in the major alleged AML failures suffered by Westpac, Australia’s second-largest retail bank, which contributed to the bank recently agreeing to a whopping $1.3 billion penalty for violating Australia’s AML/CTF Act.

Statutory and Regulatory Requirements for Correspondent and Private Bank Accounts

Section 312 of the USA PATRIOT ACT, enacted at 31 U.S.C. § 5318(i), is titled “Special Due Diligence for Correspondent Accounts and Private Banking Accounts.” Section 312 requires financial institutions that establish, maintain, administer or manage a “correspondent account or a private banking account in the United States for non-U.S. persons” to subject such accounts to special AML compliance measures – including, where appropriate, EDD specifically targeted towards money laundering in those accounts. The regulations enacted pursuant to Section 312 require at 31 C.F.R. § 1010.610(a) covered financial institutions to establish specific due diligence policies for correspondent bank accounts for foreign financial institutions that:

(i) Determin[e] whether any such foreign correspondent account is subject to EDD; (ii) assess[] the money laundering risks presented by each such foreign correspondent account; and (iii) apply[] risk-based procedures and controls to each such foreign correspondent account reasonably designed to detect and report known or suspected money laundering activity, including a periodic review of the correspondent account activity sufficient to determine consistency with information obtained about the type, purpose, and anticipated activity of the Account.

Sections 1010.610(b) to (d) of these regulations also require covered financial institutions to establish EDD policies for correspondent bank accounts that “reflect the risk assessment of the account” and:

1) obtain information regarding the foreign bank’s AML program;

2) monitor the transactions involving the correspondent account;

3) understand the identity of those authorized to direct transactions in the account, including beneficial and true owners of related assets;

4) determine whether the foreign bank maintains correspondent accounts for other foreign banks using the institution’s correspondent account, and monitor as needed; and

5) discover the owners of the non-public foreign bank and the extent of its ownership interest.

Section 1010.610(d) identifies special procedures to be used when EDD cannot be performed, such as refusing to open the account, suspending transaction activity, filing a Suspicious Activity Report (“SAR”), or closing the account.

Section 1010.620 applies similar requirements to private bank accounts, requiring due diligence to understand nominal and beneficial owners, determine if they are senior foreign political figures, understand the source and purpose for funds deposited into the account, and compare that information to account activity. If a senior foreign political figure is a nominal or beneficial owner of the account, the institution must implement EDD procedures to the account. When EDD is unavailable, the institution should refuse to open the account, suspend transaction activity, file a SAR, or close the account.

The Role of Correspondent Banking Relationships: Why Special Scrutiny Applies

Some context is appropriate. Correspondent bank accounts have a complicated regulatory status. They are necessary to the world financial system, but also present higher risk from an AML perspective.

International financial transactions typically flow through two or more banks in multiple jurisdictions. Because the U.S. dollar is the primary currency for global trade, there is a tremendous movement of funds between non-U.S. institutions flowing through the U.S. even if neither party is based in the U.S. Funds going from Country A to Country B, if denominated in U.S. dollars, typically will flow through a U.S. bank as an intermediary bank. This international movement of funds is conducted through so-called “correspondent banking” relationships.

As noted, U.S.-regulated banks must conduct due diligence on correspondent bank accounts at the opening of the account and periodically over the life of the relationship. If the correspondent bank account is classified as high risk, the U.S.-regulated bank is expected to conduct EDD, both initially and periodically during the relationship.  A correspondent bank may be classified as high risk, for example, because it operates in a high risk jurisdiction. U.S. banks are expected to undertake greater monitoring of such accounts for suspicious activity.

Global and U.S. regulators have focused on correspondent banking relationships since 2001, when the U.S. correspondent bank relationships were identified by regulators as a high risk for facilitating money laundering. Since that time, correspondent banking has been a focus of regulation, supervision, and enforcement activity. FinCEN published final rules regarding Section 312 of the Patriot Act for general due diligence and enhanced due diligence for correspondent accounts in 2006 and 2007, respectively. These FinCEN regulations have been incorporated into the Federal Financial Institutions Examination Council BSA/AML examination manual, which has a particular section regarding foreign correspondent accounts.

The focus on risks from correspondent bank sometimes has been so acute that the international banking system is now dealing with the consequences of “de-risking.” Many banks in U.S. and European jurisdictions have terminated correspondent bank relationships, leaving businesses in some countries with little if any access to the global financial system.  As we have blogged, the U.S. Department of the Treasury and four U.S. federal banking regulators issued a “Joint Fact Sheet on Foreign Correspondent Banking” to clarify AML enforcement priorities, and highlight the importance of maintaining correspondent banking relationships with foreign financial institutions and the value of the free flow of monies within and across global economies. The Fact Sheet, in conjunction with a blog post by Treasury, attempted to allay concerns raised by industry and groups such as the International Monetary Fund about the trend of “de-risking” by U.S. banks as a result of fear of aggressive AML/BSA enforcement by U.S. regulators and law enforcement.  The Fact Sheet suggested that U.S. banks have overreacted to concerns over AML/BSA enforcement by unnecessarily terminating correspondent banking relationships with foreign banks. It noted that these relationships are crucial to the global economy and reflexive “de-risking” may destabilize or disrupt access to U.S. financing, hinder international trade, cross-border business, and charitable activities, and make claim remittances harder to effectuate.

The Recordkeeping Burdens

We return to FinCEN’s new request for comment. Compliance with correspondent bank account EDD can be burdensome. FinCEN therefore issued its request for comment on the burden placed on all 16,938 covered financial institutions. In calculating the burden, FinCEN limited the scope to “maintaining and updating a due diligence program[] as part of the AML program” and “securing approval of the program by an appropriate level of senior management.” FinCEN estimates the annual hourly burden of maintaining and updating the due diligence program for foreign correspondent accounts and private banking accounts at two hours per covered financial institution, which resulted in an estimate of 33,876 hours, as detailed in Table 2 below.

FinCEN calculated the hourly costs of the burden estimate by identifying “four roles and corresponding staff positions involved in maintaining, updating, and obtaining senior management approval of the due diligence program” and “calculated the fully loaded hourly wage” for these roles as well as additional benefits costs, as demonstrated by Table 3 below.

FinCEN further dissected its estimate by attributing “one burden hour at $133.00” for senior management review and approval plus “one hour at $48.00” for actual content updates to calculate the weighted average hourly cost of maintaining and updating the due diligence program, as demonstrated by Table 4 below.

FinCEN then calculated the “total estimated cost of the traditional annual PRA burden” to be $3,065,778, as reflected in Table 5 below.

FinCEN additionally announced its intent to “add a supplemental annual PRA burden calculation that will include the estimated hourly burden and cost to maintain records to document compliance with the due diligence and EDD procedures for” foreign correspondent accounts and private banking accounts. FinCEN does not currently have the information necessary to estimate those hourly burdens, nor can it precisely estimate the “traditional annual PRA burden.” For that reason, FinCEN relies on estimates used in prior renewals, but will be conducting more “granular studies . . . in the near future, to arrive at more precise estimates of net BSA hourly burden and cost.”

Specific Requests for Comment

FinCEN poses numerous questions requesting data from covered financial institutions. Condensed, these questions ask financial institutions how long it takes to perform due diligence and EDD for correspondent bank accounts; whether the institution performs periodic reviews of such accounts and their transaction activity, and if so how long do the reviews take; whether the institution has a review and approval process involving senior management to evaluate the conclusions of any reviews of correspondent accounts; and the time and resource demands associated with obtaining information on correspondent and private bank account customers, the source of funds for those accounts, and the other foreign banks with access to the accounts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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